Bus Comm Report Final 03062011

8/6/2019 Bus Comm Report Final 03062011

1/18


2/18

Page | 2 of 18

CCCooonnnttteeennntttsss ooofffTTThhheee RRReeepppooorrrttt

ACKNOWLEDGEMENTS 3

GLOBAL ECONOMIC CRISIS & STABILITY OF THE BANKING SYSTEM 4

IMF REPORT: ISLAMIC BANKING CAN SPUR GROWTH IN MUSLIM WORLD 5

AN ECONOMY-WIDE APPLICATION OF ISLAMIC BANKING AND FINANCE 6

INTEREST RATE REVIEW FOR CONVENTIONAL BANKING IN PAKISTAN

(2007-2010)

10

ISLAMIC BANKING AND FINANCE IN PAKISTAN 11

ISLAMIC BANKING INDUSTRY PROGRESS AND MARKET SHARE (UP TO DEC 2010) 13

CONCLUSION 17

WAY-FORWARD 18


3/18

Page | 3 of 18

Acknowledgements

First of all we would like to thank Almighty Allah for giving us the courage and

ability to complete this report.

We would also like to state that this report would have not been completed in such

a manner of professional report writing without attending BusinessCommunication course.

We also thank our mentor, Mr. Farhan Raza who provided us an opportunity to

apply Business Communication skill in

real action.

GLOBAL ECONOMIC CRISIS & STABILITY OF THE BANKING SYSTEM

There is widespread agreement on the fact that the earlier than expected recovery of theglobal economy is a prelude to improvements in both consumer as well as producer


4/18

Page | 4 of 18

confidence; however the process remains uneven and patchy leaving some countries,sectors, industries, and at the micro level, some firms, still struggling to break-even.

In Pakistan, the indirect impact of the Global Financial Crisis (GFC) and ensuing recessionin advanced economies was clearly evident in 2009. As in the rest of Asia, the indirectimpact of the GFC manifested itself in various forms in the real sector of the economy.

Indeed there was a decline in exports due to recession in economies which are Pakistansmajor trading partners, and there was pressure on capital flows where strained liquidityposition in global financial markets impacted foreign portfolio investment. The maincomponents of capital flows are workers remittances, foreign direct investment (FDI) andforeign portfolio investment (FPI). Although workers remittances increased from USD 7billion in CY08 to USD 8.7 billion in CY09, yet this improvement has been offset by the fallin FDI from USD 5.4 billion in CY08 to USD 2.4 billion in CY09 and further deterioration inFPI from outflows of USD 269 million in CY08 to outflows of USD 608 million in CY09.

However, factors such as the energy crisis leading to under-utilization of industrial capacityand rise in the cost of production, the long-standing issue of inter-corporate circular debt,considerable decline in foreign direct investment due to weak economic fundamentals, andabove all, the mounting fiscal deficit breaching previous records in the countrys economichistory, all had a role to play in keeping the process of economic recovery in Pakistantenuous at best.

The leading evidence of these various pressures on domestic firms and industries was thattheir loan repayment capacity was compromised, with a consequent rise of NPLs on thebanks balance sheets. Cash dividend distributed by the banking sector in CY09 declined by

22.8 percent on YoY basis from Rs. 26.5 billion to Rs. 20.4 billion.

Notwithstanding the various challenges in the economic environment, banks have managedto continue to perform well, as is evident from the fact that their overall ROA (net of taxes)is 0.9 percent in CY09, still less than the conventional norm of 1.0 for banks, but animprovement over ROA of 0.8 percent in CY08. This indicates their capacity to withstandchallenges from their operating environment.

Notably, there were also some positive developments during the year. These include asubstantial decline in the international oil and commodity prices which eased the pressureon the external current account deficit, improved crop outputs, and substantial

improvement in banks liquidity position, etc. These various developments helped tomitigate persistent inflationary pressures and offered room for lowering the SBP policyrate from 15.0 percent at end-CY08 to 14 percent during CY10. This easing of monetarypolicy was consistent with signs of improvement in economic indicators.IMF REPORT: ISLAMIC BANKING CAN SPUR GROWTH IN MUSLIM WORLD


5/18

Page | 5 of 18

A recent International Monetary Fund (IMF) report of Sept, 2010, has argued that therapidly growing Islamic banking sector may accelerate economic development of theMuslim world.

In their working paper Islamic Banking: How Has it Diffused? IMF researchers Mr. PatrickImam and Mr. Kangni Kpodar note that Islamic banking with its finance potential can solvethe problem of slow growth in the worlds Muslim nations. We showed that Islamicbanking has, in a few decades, moved from a niche market into the mainstream.Because Muslim populations are under-banked, and given the tremendous need forinfrastructure projects like roads and housing across the Muslim world, developmentof Islamic banking can spur growth in these regions and can be part of the solution tothe slow development process, they wrote in the report.

Islamic banking came as a market response to the financial needs of devout Muslims whohave been looking to invest their savings in a way that does not conflict with Islam, whichproscribes engaging in interest-bearing transactions, a mainstay of conventional banks.

It is an increasingly visible alternative to conventional banks in Islamic countries andin countries with large Muslim populations, such as the UK. Globally, the assets of theseinstitutions have grown at double-digit rates for a decade, and some conventionalbanks have opened Islamic windows, with Shariah-compliant financial assets reachingan estimated $509 billion at end-2007, the IMF report said, reiterating the InternationalOrganization of Securities Commissions (IOSCO) prediction that as much as half of the

savings of the worlds estimated 1.2-1.6 billion Muslims will be in Islamic financialinstitutions by 2015.

In addition to that, the international organizations report also opposed the marginal view

that Islam negatively affects growth. Much of the evidence does not support thisargument. First, the Golden Age of Islam between the 9th and 15th centuries, whenadvances were made in science, literature, navigation, law, and philosophy, illustratesthat Islamic societies are capable of progress and innovation when the rightenvironment is in place. In fact, not only does Islam not negatively impact growth, butIslamic banking could complement conventional banks and thereby help diversify

systemic risk, the report concluded.

AN ECONOMY-WIDE APPLICATION OF ISLAMIC BANKING AND FINANCE


6/18

Page | 6 of 18

Can a Muslim country transform its economy according to the principles Islamic

finance in a successful manner? What are the prerequisites for success?

The conventional banking still holds sway over the overwhelming part of the bankingoperations internationally. However, over the last thirty years, some of the Muslimcountries have started Islamic banking which is running parallel to the conventionalbanking system. Islamic banking is yielding a reasonable success as evident by its growth(around 15%) annually. The current success of Islamic banking and finance has beenaccomplished despite the unavailability of an ideal legal and institutional set up which isimperative to support the operation of these banks. There is no doubt that once anappropriate institutional infrastructure is completed, their degree of success will be evengreater. Provision of enabling framework which may include compatible national andbanking laws, rules and regulations, tax regime, accounting.

In case all interest-based transactions are abolished from the economy, what would

be the economic implications on national and international level?

In case all interest based transactions are abolished from the economy, the implications atthe national and international level may be visualized as follows:

A. Implications at the national level:

The following will be the implications at the national level.

i. Adopting the operating method of Islamic banking:

The economic consequences of eliminating interest at the national level could be

anticipated on the basis of considering the nature of the business operations of Islamicbanks. As previously pointed out, Islamic banks can undertake financing throughpartnership modes as well as sales-based modes involving fixed returns. Therefore, Islamicbanking offers a wider scope of operations where it can follow up and monitor more closelythe activities and performance of the enterprises it finances. It can employ variousmonitoring techniques and procedures including sitting on boards of directors to obtaininformation in its capacity as partner who has a stake in the capital of those companies.Economists believe that Islamic banks face fewer risks than purely commercial onesregardless of whether the national economy is undergoing a period of economic recessionor upswing. Hence, the greater the ability of Islamic banks to employ the monitoringtechniques the less amenable they become to moral hazards. This gives Islamic banking an

edge in profitability over commercial banks.

Islamic banking has valuable opportunity of using proper mix of financial modes. They canchoose the proper mix of partnership and fixed-return modes that would afford them moreeffective monitoring at lower costs. For this reason, they can become relatively moreprofitable as well as efficient and as a result the national economy as a whole would gain.ii. Resource allocation on production bases


7/18

Page | 7 of 18

The most important aspect characterizing Islamic financing at the macro-economic level isits unique method of financial resource allocation. The allocation of financial resources in aconventional economy revolves around the rate of interest and where the creditworthiness of the borrower is the main criterion for lending funds. In an interest-freeeconomy, financial resources are allocated on the basis of production and commercialcriteria. This implies that under Islamic finance, the vital factor of obtaining the financingfacilities is the ultimate results of the enterprise whose operations are being financedwhereas the credit worthiness is the secondary factor. Resource allocation on the basis ofproduction and commercial criteria is more oriented towards growth and developmentwherein the financial sector remains in harmony with economic fundamentals.

Islamic finance modes are of two types: partnership and markup. Once an agent obtainsfinance of the second type, he ends up owing a loan to the finance provider. Nonetheless, anIslamic banking system does not face problems associated with debt accumulation becausethe debt generated is used to finance real transactions i.e. the purchase of real commoditiesand assets. In addition, the markup is set once and it is not cumulative. Furthermore, the

debt is not marketable, as it is sellable only at face value. This makes debt renewal oraccumulation much more difficult. In this context, it is inconceivable that Islamic financingcould generate debts to the extent that their volume would exceed the volume of thecommercial and production activities financed. Furthermore, the bulk of debts in aconventional economy, mostly government debt, would be replaced in an Islamic economyby financing through Islamic modes. There is no room for a large volume of transactions indebt instruments (bonds) as appears in conventional economies, where the volume of suchtransactions reaches multiples of GDP. Unlike a capitalist economy, the Islamic economy isnot heavily leveraged. Thus, such an economy would be well protected against shocksresulting from debts.

iii. Relative stability of the banking systemConventional banks hold assets resulting from personal and business finance which cangenerally be riskier than their liabilities to their depositors. The conventional bankingsystem would therefore face some measure of instability especially during the downturn ofthe business cycle or generally during periods of low aggregate demand. At such time,higher rates of business failures and bankruptcy could bring the average rate of return onbanks' investments below the average rate of interest they have to pay on time deposits.This exposes banks themselves to business failures.

By contrast, Islamic banks guarantee only demand deposits and shares the risks withinvestment depositors. An Islamic bank may not generally be expected to incur losses, even

at times of low levels of aggregate demand, because of its wider scope of activities. Whenthe rates of return on its investments decline, so does the rate of return paid out to thedepositors. The possibility of business failure faced by Islamic banking is therefore lesseras compared to its conventional counterpart. We can, therefore, conclude that Islamicbanking is more stable which in turn gives an added measure of stability to the domesticeconomy.

B) Advantages of Islamic Financing at the International Level


8/18

Page | 8 of 18

The present age of globalization has witnessed the narrowing/eliminating the gaps ofcommunication. Further, the market disclosures are also getting enhanced which wouldexpose the economies to the influences of external factors that pass through trade as wellas capital flow channels. A single country cannot place trade controls without consultingthe World Trade Organization (WTO). After repeated international financial crises,especially that which befell the South East Asian countries, economists found themselvescompelled to reconsider their preference for free capital flows, especially short-term. Thiscannot be ignored that such flows are associated with interest-based financing, where debtbecomes marketable and free moving.

In a conventional economy, debt financing comes in a pyramid-shaped chain, where foreignbanks lend local banks, which in turn lend individuals and local enterprises. Most of thislending is on short-term basis. Once foreign banks face a problem, they recall their loansfrom local banks, which in turn recall their loans from domestic borrowers. Thus thepyramid of debts starts to collapse and a financial crisis ensues.

An Islamic economy would receive external capital flows using only Islamic modes offinance. Whether based on partnership or markup, those flows would be contractual andare neither marketable nor recallable on notice. It can, therefore, be imagined that thosewho wish to provide external capital flows to an Islamic economy would have to wait untilthe maturity dates of their debts before withdrawal. Those interested in providing externalfunds on a partnership basis would have to abide by the partnership contracts. Therefore,Islamic financial system is not prone to those risks which the conventional banking systemis exposed to.

Can Islamic banks play any role in economic development of the Country?

While functioning within the Shariah framework, Islamic banks can perform a crucial taskof resource mobilization and efficient allocation using either profit sharing (Musharaka andMudarabah) or trading & Ijarah based categories of Islamic modes of financing. Profitsharing modes can be used for short, medium and long-term project financing, importfinancing, pre-shipment export financing and working capital financing transactions. Inorder to ensure maximum role of Islamic finance in the development of economy it wouldbe necessary to create an environment which may induce financiers to earmark more fundsfor Musharaka/Mudaraba based financing.

The non-PLS techniques, as acceptable in the Islamic Shariah, not only complement the PLSmodes but also provide flexibility of choice to meet the needs of different sectors of the

society based on their risk profile. Trade-based techniques like Murabaha with lesser riskand better liquidity options have several advantages vis--vis other techniques but may notbe as fruitful in reducing income inequalities and generation of capital goods asparticipatory techniques would do. Ijarah related financing which requires Islamic banks topurchase and maintain the assets and afterwards dispose them off according to Shariahrules, require the banks to engage in activities beyond financial intermediation.Salam has a vast potential in financing the productive activities in crucial sectors,particularly agriculture, agro-based industries and the rural economy as a whole. It


9/18

Page | 9 of 18

provides incentive to enhance production as the seller would spare no effort in producing,at least the quantity needed for settlement of the loan taken by him as advance price of thegoods. Salam can also lead to creating a stable commodities market especially the seasonalcommodities and therefore to stabilize their prices. It would enable savers to direct theirsavings to investment outlets without waiting. This would help them to invest their surplusfunds till the harvesting time of agricultural products or the time when they actually needindustrial goods and without being forced to spend their savings on consumption.

On the basis of the above it can be said that supply and demand of capital would continuein an interest-free scenario with additional benefit of greater supply of risk-based capitalalong with more efficient allocation of resources and active role of banks and financialinstitutions as required in asset based Islamic theory of finance. Islamic banks can not onlysurvive without interest but also could be helpful in achieving the objective of developmentwith distributive justice by increasing the supply of risk capital in the economy, facilitatingcapital formation, growth of fixed assets and real sector business activities.

Banks might engage in fund and portfolio management through a number of assetmanagement and Ijarah and trading companies. Such companies/entities can exist in theeconomy on their own or can be an integral part of some big companies or subsidiaries.They can manage Investors Schemes to mobilize resources on Mudarabah basis and tosome extent on agency basis and use the funds so collected on Murabaha, Ijarah or equityparticipation basis. Subsidiaries can be created for specific sectors/operations whichwould enter into genuine trade and Ijarah transactions. Low-risk Funds based on short-term Murabaha and Ijarah operations of the banks in both local as well as foreigncurrencies would be best suited for risk-averse savers who cannot afford possible losses inPLS based investments. Under equity based funds, banks can offer a type of equityexposure through specified investment accounts where they may identify possible

investment opportunities from existing or new business clients and invite account-holderto subscribe. Instead of sharing in the banks profit, the investors would share the profits ofthe enterprise in which funds are placed with the bank taking a management fee for itswork.

Small and medium enterprises (SME) sector has a great potential for expanding productioncapacity and self-employment opportunities. Enhancing the role of financial sector indevelopment of SME sub-sector could mitigate the serious problems of unemployment andlow level of exports.

Keeping in view the above, it can safely be said that Islamic banking has a great potential of

playing an effective role in the development of the country.

INTEREST RATE REVIEW FOR CONVENTIONAL BANKING IN PAKISTAN

(2007-2010)


10/18

Page | 10 of 18

The structure of interest rates in the economyis another important determinant of credit

risk in the banking sector. Interest rate volatility,besides affecting interest rate risk, alters the costof borrowing which is inextricably linked tothe repayment capacity of the borrowers.Figure shows trends in leading interest rates likethe SBP repo rate, which sets the tone of theterm structure of interest rates, along with theweighted-average lending rate (WALR) and the6-month KIBOR, which is the benchmark forpricing loans.

With the start of CY09, two developments took place with the easing in the monetary policystance:

(1) lending rates in the primary as well as secondary market started declining, and(2) interest rate volatility, which aggravates uncertainty in the system, started subsiding.

The introduction of the interest rate corridor in August CY09 proved to be instrumental instabilizing the overnight money market repo rate. As the level of interest rate directlyimpacts the cost of borrowing, therefore any reduction in its level as well as volatility helpsin managing the credit risk profile.

ISLAMIC BANKING AND FINANCE IN PAKISTAN


11/18

Page | 11 of 18

Islamic finance, initiated modestly about four decades ago to cater to the financial servicesneeds of faith sensitive Muslim population, particularly the high net worth individuals andgroups in UAE and Middle East, has now acquired the status as an integral component ofthe global financial system. The Islamic finance industry has been growing at anexceptionally fast pace and extending its outreach beyond the Muslim countries, which isindicative of its increasing acceptability as a viable and competitive alternative to theconventional system; since 2006 the industry has grown on average 28 percent annuallywith assets reaching US$822 billions. Presently more than 1100 Institutions offeringIslamic Financial Services (IIFS) operate across the globe, which, coupled with a number ofdedicated academic, legal, regulatory and supervisory institutions, provides a solidplatform for future growth and development of the Islamic finance industry.

The recent crisis in the western financial markets has also given a big boost to theacceptability and promotion of Islamic banking as a more stable and prudent system thanits conventional counterpart. The inherent checks and balances in Islamic finance, whichprohibits Islamic financial institutions to deal in speculative and Haram activities (the

businesses which are detrimental for welfare of the mankind) and requires them to ensureEquity, Justice and Transparency in their transactions, largely kept the Islamic financialInstitutions insulated from the financial crisis. The frequently recurring crisis in theconventional system, several in the last four decades, on the other hand highlights itsembedded weaknesses and vulnerability to speculative and self interest maximizationbehavior. As we witnessed during the financial crisis, even the most sophisticated andmodern regulatory and supervisory systems were unable to ensure soundness and stabilityof a system with inherent weaknesses. Accordingly there is a need to revisit theconventional system and extricate from it the embedded weaknesses and avoid the oftenrecurring crisis in the financial markets to achieve longer term economic stability. Theinherent strengths and control mechanism of Islamic finance could provide the requisite

stability, provided it achieves greater efficiency, consumer convenience and flexibility, thatis the hall mark of the conventional system.

The current Islamic banking paradigm, both in Pakistan and elsewhere, is however, basedon the replication of conventional banking products. While the replication and mimickingof conventional products to make them Shariah compliant does pass the Shariahpermissibility test, it is insufficient to achieve the objectives of Islamic finance, particularlythe broad based and equitable distribution of economic gains. The complete reliance ofIslamic banks on debt based fixed income products and minimizing the risks close to thoseof the conventional system is not only blurring the distinction between Islamic andconventional finance but also making Islamic banks relatively less efficient than their

conventional counterparts. Thus to sustain the growth momentum, the industry will needto diversify its product mix by focusing on areas where it has comparative advantagerather than blindly following the conventional system, that in itself possesses inherentweaknesses that give rise to cycles of booms and busts. In Pakistan for instance 67% ofIslamic banks financing is concentrated in the corporate sector through Murabaha, Ijarah,and Diminishing Musharaka. As most corporates maintain banking relationships withconventional banks, the Islamic banks have to offer significant price discounts to attractsuch corporate clients. While this may improve the quality of its financing portfolio, it


12/18

Page | 12 of 18

however reduces profit margins and inhibits its ability to offer better returns to thedepositors. This also directs access to finance to the well established businesses andcorporates and leaves the SMEs and startup businesses financially excluded. This naturallyis contrary to the business model of Islamic finance, that promotes risk and reward sharingand encourages financing to promising startups that is critically important for promotingentrepreneurial culture. The financing to SMEs and startup ventures through participatorymodes like Musharaka gives the SMEs/startups the necessary cushion to withstand theteething problems with no fixed interest cost. Although startups are relatively riskier,professional appraisal of the venture, and capacity of the entrepreneur to manage theventure could considerably lower the risk of failure and enable Islamic banks to earnattractive returns that will allow them to pay better returns to their depositors.

The Islamic banking initiative was re-launched in Pakistan in 2001 as an alternate andparallel system to provide an option to the public to enable them to choose the product thatbest serves their needs. Learning from the experience of 1980s, a comprehensive legal,regulatory and Shariah compliant framework was put in place before launching the

initiative.

The framework allowed three types of Islamic banking institutions:i) Full fledged Islamic banks,ii) Islamic banking subsidiaries of conventional banks andiii) Islamic banking branches (IBBs) of conventional banks. Additionally

conventional banks having IBBs could also have Islamic banking windows intheir conventional branches. Considering

The increased interest of banks to convert their conventional branches into Islamic

branches, we have recently announced the criteria for such conversions. The initiative hasbeen a big success; the Islamic banking Industry has grown manifold since 2001 andpresently constitutes more than 6% of the banking system in Pakistan. Although there hasbeen some deceleration in growth during the last couple of years, largely due to aslowdown in overall economic activity, the Islamic banking industry is likely to regain itsgrowth momentum and increase its share to 10-12% over the next 2-3 years.

ISLAMIC BANKING INDUSTRY PROGRESS AND MARKET SHARE (UP TO DEC 2010)


13/18

Page | 13 of 18

The Islamic banking industry maintained its growth trajectory during the last quarter of CY2010 despite various challenges being faced by the economy. The industrys assets baseduring the quarter increased by 12.5 percent to Rs 477 billion from Rs 424 billion as at theclose of September 2010; the YoY growth in the assets was 30 percent. The deposits duringthe quarter increased to Rs 390 billion from Rs 338 billion in September 2010 reflecting agrowth of 15.3% on a QoQ basis whereas on the YoY basis, the deposits grew by 38% fromRs 283 billion as on December 2009.

The investment and financing activity recordeda big surge during the quarter with 96 percentand 18 percent growth respectively on QoQbasis. The unprecedented surge in investmentsis attributable to issuance of long awaited GOPIjarah Sukuk of Rs.89 billion during the quarter,whereas the handy growth of 18% in financingcould be attributed to seasonal uptake in credit;the cotton harvesting commences during theOctober-December quarter that gives significantrise to credit/financing demands by textile

sector(share of financing by IBIs to the textile sector increased from 18% to 22% duringthe quarter). The YoY growth in investments and financing was 144 percent and 33 percentrespectively as they increased to Rs 158 billion and Rs 180 billion respectively in December2010 from Rs 72 billion and Rs 153 billion in December 2009. The pick-up in financing andinvestment activities during the current quarter is encouraging and would be instrumentalin further accelerating the growth momentum as the enlarged investment avenues wouldgive boost to IBIs drive for deposit mobilization.On the international front, the establishment of International Islamic LiquidityManagement Corporation (IILM) in Malaysia during the quarter would also help IBIs across


14/18

Page | 14 of 18

the globe to better manage their liquidity. IILM is a supranational body established todevelop Shariah compliant liquidity management solutions for Islamic banks. State Bankhas also sought membership of IILM to be part of an important international forum whichwould further enlarge investment avenues for IBIs.

OPERATING PERFORMANCE

Despite rapid growth in IBIs assets and deposits, their profitability, as reflected by the keyindicators remained considerably lower than the industry average. The ROA and ROE ofIBIs at 0.6% and 5.2% respectively for the quarter ended 31st December 2010 wassignificantly lower than the industry average of 1% and 9.8% respectively.

The lower ROA and ROE for IBIs is attributable largely to the growing and evolving stage ofIBIs; the industry has expanded its branch network significantly during last couple of yearsthat entails considerable upfront investment/expense, whereas the new branches taketime to acquire customers, achieve breakeven and then start earning profits for the bank.This is evident from the operating expense to gross income ratio for IBIs which is at 73% ascompared to 53% for the industry.

ASSET QUALITY


15/18

Page | 15 of 18

Encouragingly the pace of growth in Non-Performing Financing (NPF) slowed downsignificantly during the quarter and reduced to just 2.4% as compared to almost 27%during the last quarter. The NPF increased marginally during the quarter to Rs. 13.8 billionfrom Rs.13.5 billion as at the beginning of the quarter. Moreover, the amount of recoveryhas also increased to Rs. 1.25 billion as compared to last years figure of Rs. 0.8 billion; thegrowth rate of recoveries was in negative during the last quarter. The YoY growth in NPFwas however significantly high at 38.2% as the NPF increased to Rs.13.8 billion as onDecember 2010 from Rs.10 billion as on December 2009.

CAPITAL

The capital to total assets of Islamic banks stands at 9.7% as compared to 9.8% for theindustry as a whole. Capital net of net NPFs to total assets of IBIs is 8.4% as compared tothe industry average of 7.7%. The higher capital of Islamic banking industry compared tothe industry as a whole may be attributed to asset based and prudent/conservativefinancing policy and resultantly lower NPFs of IBIs.

FINANCING PORTFOLIO

The financing type wise mix of IBIs financingportfolio shows that Murabaha basedfinancing further strengthened its dominancein IBIs portfolio with almost three percentagepoints increase in its share in the IBIsportfolio. This also lead to increase in shareof Murabaha, Ijarah and DiminishingMusharaka to 88% from 85% as at thebeginning of the quarter. The share ofMusharaka financing declined to 2.9% during

the quarter from 3.7% as at the beginning ofthe quarter. Shares of Salam and Istisnameanwhile marginally increased to 1.4% and5.8% respectively from 1.0% and 5.4% in theprevious quarter.SECTORAL CONCENTRATION OF

FINANCING


16/18

Page | 16 of 18

The table 5 gives sectorwise distribution of IBIsfinancing portfolio. Thelargest share of financingwent to textile sector(22%), followed by 17% toindividuals and 7% tochemical and pharmasectors in comparison tothe industry average of19%, 12% and 3.9%respectively for thesesectors.

Financing to Production

and Transmission of Energy and Cement sectors constituted 7% and 4% of IBIs financingportfolio respectively as compared to the industry average of 9% and 3%. The IBIsfinancing to the energy and cement sectors witnessed significant growth during the year astheir share in the IBIs financing portfolio increased by 3 and 2 percentage pointsrespectively to 7% and 4%.

DEPOSIT MOBILIZATION

The deposits of IBIs increased to Rs 390 billion as at close of the quarter under review with

a YoY and QoQ growth of 38% and 15% respectively. The fixed deposits at Rs 143 billion

had the largest share of 37% in IBIs deposit mix followed by savings deposits which at Rs.

126 billion constituted 32% of total deposits. The deposits in current accounts constitutemore than 23% of IBIs deposit base. While the fixed and savings deposits grew by about

11% each during the quarter, the growth in current deposits at 23% was more than double

than the savings and fixed deposits growth.


17/18

Page | 17 of 18

BRANCH NETWORK

The IBIs branch network increased to751 branches during the quarter from684 as at the beginning of the quarter.The significant growth in number ofbranches is attributable to the openingof branches planned in the Annual

Branch Expansion Plan (ABEP) for thecalendar year 2010. The permission forbranches, given in ABEP lapses if

branches are not opened by 30th Novembereach year.

The province wise distribution of the branchnetwork reveals that Punjab and Sindh have

the bulk of IBIs branch network (79%), with339 and 253 branches in Punjab and Sindhrespectively. The review of the branch

network in these two provinces further revealsthat Lahore, Rawalpindi and Faisalabad accountfor 127, 34 and 30 branches respectively, which constitutes around 56% of the totalbranches of IBIs in Punjab. Similarly, Karachi alone with 210 branches accounts for 83% ofthe total branches located in Sindh. The conversion of the conventional branches intoIslamic banking branches has picked up pace and in the last seven months 15 conventionalbanking branches have been converted into Islamic banking branches.

The full fledged Islamic banks are gradually increasing their branch network in second tiercities while conventional banks are expanding their outreach to such cities both byestablishing stand alone branches and Islamic banking windows. It is expected thatgradually IBIs branch/windows network would expand to wider geographic territory ofthe country.CONCLUSION

As a gist we can say that the Islamic banking and finance is growing in the country with anincreased interest of general public which is apparently due to collateral / real assets basedfinancing instruments against the conventional banking where major slumps wereobserved in the recent past due to sub-prime mortgagees.


18/18

Page | 18 of 18

WAY-FORWARD

We expect that our presentation in combination with the report will illustrate more skillswhich we have learned in this good course of business communication.

Documents

Bus Comm Report Final 03062011